The Edinburgh Investment Trust plc (EDIN) Earnings Call Transcript & Summary

Good morning, everyone. Thank you very much indeed for coming here today to attend the 2025 Edinburgh Investment Trust Annual General Meeting. We're delighted to have so many shareholders here today in person as well as those that are also dialing in online. My name is James Mowat, and I work for Liontrust, the investment management group with day-to-day responsibility for your company's assets. I will shortly hand over to Elisabeth Stheeman, the Chair of Edinburgh Investment Trust, who will formally open the meeting and chair proceedings. Before I do that, I would like to tell you how the rest of the meeting will proceed. After opening the meeting, Elisabeth will make her own introductory comments and then take us through the day's formal business, including the voting resolutions. We will then have an update on the performance of the company and the underlying investments that it holds on your behalf. That update will come from your investment management team, Imran Sattar, Emily Barnard and Tom Gilbey. They are looking forward to giving you an insight into their day-to-day work and the investment edge that flows from it. We will then open the meeting to questions, both for the Board of Directors sitting here on the stage and to me and the rest of the investment management team. After the question-and-answer session has concluded, that will wrap up the formal business of the meeting and refreshments will then be served in the room where some of you have already seen the tea on coffee -- seen the tea and coffee on offer. and all of us will be available for further informal conversations over that light lunch. But for now, I will hand over to your Chair, Elisabeth Stheeman.

Thank you, James, and good morning, everyone. Welcome to the Annual General Meeting of Edinburgh Investment Trust as convened by the notice to shareholders dated 20th of May 2025. In accordance with the company's articles, I will chair the meeting and represent the proxy votes that have been submitted in advance. I confirm that a quorum of shareholders is present, and I declare the meeting open. May I add to James' welcome. It's super to see such a nice turnout at this meeting, both some familiar faces and some new ones. I would also like to take the opportunity to introduce the other 4 directors that serve with me on the Board. [indiscernible] he's the Senior Independent Director and is responsible for overseeing the company's marketing activities in conjunction with the manager Liontrust. We use a variety of marketing tools, whether it is advertisements, shareholder events like this or online content. Patrick Edwardson here and closest to me, the Chair of our Management Engagement Committee. Patrick oversees the relationships with our key suppliers, including the investment manager. Patrick is an experienced investor having worked all of his investment career at Bailey Gifford. Steve Baldwin, on the other side, an experienced accountant and corporate financier. Steve chairs our Audit Committee, responsible for overseeing the production of the company's annual and interim reports. And then on the far end, Annabel Bannerman, an executive at Bakkavor, a publicly listed company. And for Edinburgh Investment Trust, Annabel takes the lead in any legal and regulatory matters. Before we come to the company's resolutions, I would like to remind you of the key achievements of your company over the last year. This year's investment returns marks a significant milestone of 5 years since the current management team were appointed. And Imran Sattar of Liontrust will talk you through the investment results in more detail later. It is great to have built such an encouraging long-term set of investment returns. As some of you will be aware, the share price is at or around the GBP 8 mark, which is close to an all-time high. Helping this strong sentiment has been a further increase in the dividend, which subject to approval later at this meeting, will mean an increase in dividends per share for the year of 5.9%, it is also good to see an improvement in the company's stock market valuation as measured by the share price discount relative to the company's efforts, which has narrowed to 6% at the end of last month. Over the last year, we've also been busy promoting your company, both to existing shareholders and to new ones. The efforts take many forms, whether shareholder events like this one and a similar event last autumn in London with the next London event scheduled for 8th of October. There's also been attendance at other investment conferences such as those organized by investment platforms and engagement with the press to write about us. For example, there have been encouraging profiles of your company in both The Times and Telegraph in the last year. And Imran, I think you've got a big one coming up also in the next few weeks with one of the investment trust specialized platforms, which will be very good. So overall, much has been achieved in the year under review, and we are looking forward to working hard on your behalf in the years ahead. I now turn to the formal business of the meeting. I propose and given the consent of the meeting present that the notice of the meeting be taken as read. Let me just explain how the voting will be done this year. In previous years, voting has been conducted by a show of hands. However, to reflect the views of shareholders of the company more accurately, voting today will be done by way of poll. This is seen as in the best interest of the company and shareholders as it gives all shareholders the opportunity to participate in the decision-making of the company and have their votes recorded in proportion to the number of shares held. In order to vote today, eligible shareholders will either hold shares in their own name or will have brought with them a letter of representation from the nominee who holds shares on their behalf. All shareholders who are eligible to vote will have received a poll voting card entering the AGM this morning from our registrars who are administering the poll. If you have voted ahead of the AGM and you do not wish to change any of your votes, there's nothing you need to do. However, if you wish to change any of your votes, you should complete a poll card for every resolution. I will now move to the resolutions. You will see the results of your proxy votes on the screen behind me with all resolutions received at least 93% of votes in favor, and apologies if the type script might be a bit small to see in the back. If you are voting today, please would you now complete your poll card by marking how you wish to vote on each resolution and then sign your poll card. You can vote in favor of a proposed resolution, against a proposed resolution or you may withhold your vote. Should you require any assistance, our registrars will be pleased to help you at the end of the meeting. The registrar is sitting at the entrance here and also there they are, so you'll get a poll card, and they can help you how to hand that in later. So poll cards should be handed to the company's registrar on leaving the AGM. And the final results will be announced on the London Stock Exchange as soon as practicable following this meeting. Voting will close 10 minutes after the end of this meeting. That concludes the voting portion of today's Annual General Meeting. I will now hand over to the investment management team, who will provide a detailed update on the company's performance and the underlying investment managed on your behalf. Thank you, and over to Imran, Emily and Tom. Thank you.

Thank you, Elisabeth, and good morning, everyone. I'm Imran Sattar, your Portfolio Manager, and I'm delighted to be here this morning and to see so many faces. The plan today is to cover 4 things. Firstly, I'll start with an overview of the trust, how it's managed and how it's performed. I'll then move on to a deep dive of the portfolio. Thirdly, we'll take you through our investment process. And finally, we'll cover the outlook for markets and the portfolio. This is the team responsible for looking after your trust. I'm the lead portfolio manager, and I'm supported by Emily Barnard, who's Deputy; and then 2 analysts, Tom Gilbey and Gabriel Lever Grecu. Emily and Tom are here with me today. A reminder of the trust's objectives. Firstly, it's to grow net asset value per share ahead of the benchmark. And for us, that's the FTSE all share. And secondly, to grow dividends ahead of U.K. inflation. Of course, you'll have had a chance to look at voting for a simplification of the objective. And if approved, you'll see that here next time around. Now we do this by building a conviction portfolio of around 40 to 50 stocks, principally invested in the U.K. stock market, but with the ability to invest up to 20% in non-U.K. listed shares. This is a portfolio that has a total return approach. What do we mean by total returns? For us, it's not just about the income. Of course, the income matters, but so does capital growth. And we're trying to optimize to achieve attractive total returns for you, our shareholders. We are, first and foremost, fundamental bottom-up stock pickers with a flexible investment style. Why flexible? Well, just like there are economic cycles, there are stock market cycles. And to be able to perform across market cycles, one has to have a pragmatic approach. We think about risk very carefully. And that for us is about fund manager oversight. That's me and my team. And then there's also the internal line trust risk team that helps provide oversight. And then we have attractive debt instruments in place, which is long duration in nature and at very low interest rates, specifically 2.42% on average, and that's a really advantaged position to be in. So how have we done? Well, I'm pleased to report that over the last 5 years, since we were appointed to manage the trust, performance has been strong in absolute terms but also relative to the benchmark. I'm hoping you've got your Edinburgh Investment Trust bags or if you haven't, you'll be shortly receiving them. And in there, you will see a 5-year anniversary document where you can see the detail around how we've performed over the last 5 years. So let's have a look at some of the numbers. Since inception, so that's the 5 years, the trust has seen its share price and NAV up triple digits against a benchmark up 76.5%. So we've comfortably met the first objective of the trust. If we move left to shorter-term performance, so that's the last 12 months to March '25, i.e., the financial year we've just completed, the share price was up double digits ahead of the benchmark and the NAV up 8.3%, so a little bit behind the benchmark of 10.5%, and I'll come back to talk about the drivers of that. To the second of the twin objectives, the dividend for March '25, as Elisabeth just mentioned, was increased by just under 6% and the CAGR, so that is the Compound Annual Growth Rate over the last 3 years has been just over 5%. And so we've met the second of the twin objectives. Let's now look at drivers of recent performance. Well, first of all, I'd say that we're delighted with company strategic, operational and financial delivery across the majority of the portfolio. On the positive side, we've seen NatWest Group produce excellent results, paying a very nice dividend and it's returning surplus capital to shareholders via share buybacks. That's been a good story. And then secondly, some of the data and analytical companies that we talked about last year have produced excellent results and have made very good strategic progress over and above that. We've been delighted with the performance there. So that's the likes of BCG, the Internet platform business, LSEG, the global financial data business; and then Verisk, the U.S.-listed insurance data business, all produced excellent results. Offsetting the positives were some of the consumer names and Spirax. So starting with the consumer names, so that's Greggs, Dunelm and Whitbread. Greggs, having seen 2 or 3 years of very, very strong trading has seen a softer patch. And then secondly, the business is investing in its infrastructure, which we're very supportive of, even if it means that profits are under pressure a little bit in the short term. Dunelm, the leading homewares retailer, again, had a soft patch of trading, but subsequently has seen very strong trading. So you've seen a really nice bounce back in the Dunelm share price. And then Whitbread, which is the owner of Premier Inn has seen fabulous strategic progress over the last 12 months or so, but again, has seen a little softer trading. But the business has made very important steps to improve returns in its U.K. business as well as the German business. So overall, a bit behind benchmark over the last 12 months, but in the context of very strong long-term performance. So what have we been doing in the portfolio recently? Well, firstly, we've added to positions in National Grid and Grainger. National Grid is the leading U.K. and U.S. regulated utility that invests in the transmission network. You will all have heard of the desire to decarbonize, and we know that economies are electrifying and National Grid is essentially a very interesting play on that. It provides an attractive dividend yield and very good earnings visibility. And so firmly fitting in with that total return philosophy that I talked about earlier. As is Grainger, again, attractive dividend yield and good growth. But that is one that Tom will be covering, so I'm not going to steal his thunder. We also purchased a new position in Money Group, which owns the moneysupermarket.com price comparison website. That is a fabulous business that's very cash generative, has high margins and high returns on capital. We think the business has the potential to become an even better business, principally because of the move to what they call the Super Save Club. So what this business is trying to do is transition customers to become members, helping you as consumers to save on your utility bills, on your mobile bills and find really good deals on credit cards, for example. I'd encourage all of you to have a look at the Super Save Club. If it is successful in transitioning customers to the club, and there's a very good chance that margins increase because at the moment, the way it wins its customers is through Google search. And if those customers come to MoneySupermarket direct via the club, that will improve margins. So excited about that one. In terms of how these have been funded, well, a combination of some sales and some trims. I'll start off with BP. We sold the position in BP. We've lost conviction in the way the business is being managed, and we have concerns around the balance sheet. And then secondly, we've trimmed positions in Verisk, Tesco and Admiral. All 3 have produced excellent results, have seen a pretty decent re-rating in their shares, and we're valuation disciplined, so we've taken a bit off from those 3 positions, but very happy with them as they are. So now let's move on to the second section of the presentation, which covers the portfolio, a deep dive into the portfolio. Now we aim to ensure the portfolio is well diversified by theme and from an economic pie perspective. And we have 2 lenses with which we look at the portfolio. The first is a thematic one, and you can see that here and the second, an economic one, which I'll come on to shortly. So these are the key themes that run through your portfolio. And we aim to ensure there are multiple drivers of returns. So we're not reliant on just 1 or 2. And if you look at some examples, starting with market champion, so that's to your left in dark blue. These are some of the market-leading companies in their respective industries. And if you take Dunelm as an example, Dunelm is the leading homewares retailer in the U.K. It has taken market share every year for the last 15 years, and it has a 7.8% market share. We think it's just getting started. We think there's significant upside in its market share potential, it's a business that's executing particularly well, and we've got a very good confidence that this business will continue to take share and cement its market leadership. If we move on to self-help in light blue there, just to the right at the bottom, in general, we own businesses that are advantaged and well run, but we also find interesting investment opportunities where there's an element of improvement. And this goes to the wide range of opportunities that we think about when we're investing in that flexible investment style that I referenced earlier. Take Unilever as an example. Unilever is a large consumer goods business that has high margins and attractive returns, but where growth has been lacklustre. Now we think with organizational change and some management change that will help unlock better growth. So that's a really good example of an improvement story. As is Anglo American, that is a business that's going through a lot of change. And I know Emily wants to talk to you about that later, so I'll leave that one to her. And then perhaps one more example, data and analytics in orange, just above self-help. There, we talked last year about an interesting investment opportunity set. And we think these businesses have delivered fabulously well for us over the last 12 months, but are well set to continue to deliver attractive profit growth. And take Rightmove as an example, Rightmove is the preeminent property portal business with first-class margins, 70% margins and a business that has a powerful economic moat that protects those margins, and I'll come back to what economic moats means. It's a business that's seeing accelerating revenue growth, not only from its pricing power because of its very strong business, but also because it's providing more interesting, more thoughtful products to its customers. So it's providing analytics to its customers, and that's very powerful. And this team accounts for about 16% of the portfolio, and we remain very excited about the potential for these data businesses to provide analytic overlays to their customers, therefore, securing the long-term futures. So hopefully, that's given you a flavor of the key themes that run through your portfolio. As I said, we have a second lens with which we look at the portfolio. And that is how well the portfolio is diversified from an economic perspective. And we're much more interested in constructing a portfolio that is economically well diversified and spend not so much time thinking about what the benchmark looks like. And you can see from this slide, starting again from the left, a broad range of exposure, starting with defensive. So that's the likes of Unilever and National Grid and Compass, fabulous defensive businesses. And then in the structural growth areas, so that's in the buckets of data and health care, really interesting exposure there in data, that's the Auto Traders and Rightmoves of this world. In health care, it's the likes of Haleon and Thermo Fisher. And then 2 areas which are more cyclical exposed. So that's financials, consumer, industrials and commodities. So we've got really good exposure in financials via companies like National -- rather NatWest, which I mentioned earlier. AJ Bell, a brilliant investment platform business, which some of you may use. In consumer, it's the likes of Dunelm and Greggs and the owner of Premier Inn, Whitbread. In industrials, it's the likes of Halma and Rotork and in Commodities, it's Anglo American and Shell. You can see this is a very well-diversified portfolio, and that's deliberate. Right at the beginning, I talked about building a conviction portfolio full of advantaged businesses, but one where there was thematic and economic diversification. We hope that you've got a good sense of the drivers of performance, the key positions in the portfolio from a thematic and a sectoral stroke economic perspective. On to the third part of the presentation, our investment process. I talked earlier about our flexible investment process. So we look at a wide range of opportunities. That said, over the medium to long term, we believe that backing advantaged businesses with structural growth and importantly, businesses that have economic moats are the ones that are going to produce the best performance. And what we mean by an economic moat is that if you've got a business like Rightmove, which is 70% margins, of course, it will attract competition. So therefore, we spend a lot of time thinking about what are the barriers to the business that protect those returns. And we spend a lot of time analyzing what the economic moat of the business is. And the ones that have the best moats are the ones that have the potential to sustain and maybe even enhance their returns. We think about portfolio construction very carefully. And that comes to the point about ensuring the portfolio is thematically diversified, economically diversified and position sizing as appropriate for the opportunities that we see. Careful risk management guardrails are in place. And again, I come back to the earlier point I made, it's fund manager oversight. It's also the Liontrust Internal Risk team oversight. And then finally, valuation. It deliberately comes at the end of the investment process. That's absolutely deliberate from our perspective. The reason is, is that we're hunting for advantaged businesses or self-help opportunities, which trade on reasonable valuations, and we don't want to own very cheap businesses that might have structural problems. So that's why valuation comes at the end of the investment process. So in a nutshell, that is our investment process and one that is essentially unchanged over the last 5 years, and it served the trust well. Now what we like to do each year is zone in on one aspect of the investment process. And last year, we zoned in into portfolio construction, specifically how we think about the macro. And for us, we have a concept called macro from the micro. So we learn our macroeconomics from meeting lots and lots of companies and building a bottom-up picture. This year, we're going to take a look at how we think about the range of opportunities. So Emily and Tom will take you through the detail, and I'll come back to finish off on the outlook for markets and the portfolio. Emily?

Thank you, Imran. Good morning, everyone. I'm going to focus in on the first part of the process, the wide range of opportunities available. I'll talk through 2 examples of companies held in the trust to explain this in more detail before passing over to Tom. So we are looking for companies that we think are underappreciated by the market. Now they can fall across the style spectrum and broadly within 3 categories of profit pools. So firstly, growing profit pools. Now where a sector or an industry has long-term structural growth drivers that will grow the size of the available profits to companies operating in that sector or industry, we call those growing profit pools. Now sectors as a whole can be growing strongly, and you can have many profit pools within that. So take the pharmaceutical sector, oncology drugs would be a growing profit pool within that as are ironically anti-obesity drugs. Now here, we are looking for companies with enduring competitive advantages that can support compounding returns to shareholders and where we think that duration is underestimated by the market. Companies here tend to deliver their shareholder returns through earnings growth, preferencing organic investment in their business over higher dividend distributions to shareholders. Now another example of a growing profit pool would be the infrastructure investment required for electrification. That's a really strong structural growth trend that the likes of National Grid, one of the newer holdings in the trust, is well exposed to. So your first category is growing profit pools. Secondly, stable-ish profit pools or market share opportunities. So this is for companies operating in industries that in real terms, growth is a bit lower in real terms, growth is probably quite stable, but where there are significant market share opportunities to drive earnings growth. Companies here will deliver their shareholder returns through earnings growth, dividends, share buybacks and a valuation improvement. A great example is the U.K. homewares market. Over the medium to long term, not an area we would expect to grow much above inflation. But for the likes of Dunelm, really strong market share opportunities for many years ahead. And the last category is declining profit pools or self-help opportunities. So this category is for companies delivering subpar performance, either due to declining industry growth rates or sometimes simply a lack of execution. Now here, we look for a catalyst to deliver a significant improvement in both operational and financial delivery and drive an earnings inflection and often a valuation re-rating. So these are turnarounds. And a great example of a turnaround in your portfolio is Anglo American, and that's going to be my first example today. So you can see on the screen a good photo of one of Anglo American's world-class copper mines. Now self-help opportunities can come in lots of different varieties. And in the case of Anglo American, almost no stone is being left unturned by the new management team as they look to improve the performance of the business. Now Anglo was a large global diversified miner and diversified across geography and across commodity. But the structure of the business has been quite complicated. And frankly, the operating performance at some of their mines has been a bit patchy in recent years. Now the structure of the business has been pro-cyclical. What that has meant is that in weaker markets, the working capital of Anglo American has been an increasing negative drag on cash generation. And when you think about miners, the time when arguably they can add the most value is at the bottom of the cycle, where they can invest countercyclically. But because of Anglo's dynamics of history, they weren't able to do this as much as they would have liked. And this is something the current management team are looking to change. So really, the first catalyst for the turnaround at Anglo American was the appointment of a new CEO in 2022. He was an internal appointment, so he is deeply familiar with the business. And the whole plan has been, I think, somewhat sped up by BHP's ultimately unsuccessful bid to buy Anglo American in May of last year. So the turnaround currently underway at Anglo American comprises 3 strands: operational improvement, portfolio simplification and driving growth. So if we go to number one, which is operational improvement. I mentioned right at the start that operating performance at some of the mines had been a bit rockier. And interestingly, this was cultural partially in origin. So Anglo had centralized the mine planning. And there wasn't enough communication with those people quite literally on the ground who really understood the assets. And this meant there were a series of misses to the market, not meeting mine plans, having to do rephasing. The new management team have reset that relationship and pushed that mine planning responsibility down to the local teams and the people that really understand the assets. Other operational improvement measures include streamlining HQ, cutting excess costs and looking at their mine fleet and optimization. Secondly, portfolio simplification, and this is arguably the most interesting thing that's going on at Anglo American at the moment. So Anglo has been large global diversified, and they are going through portfolio simplification to become focused on future-facing metals. So that's copper, premium iron ore and a crop nutrient or fertilizer called polyhalite. And that will position Anglo right at the nexus of some really interesting growth trends. So for copper, that is electrification of economies globally; for premium iron ore, that's improving living standards and steelmakers are facing tighter emission standards, and so they need higher grade iron ore, which Anglo has in the portfolio. And for the fertilizer, the key trend there is food security. So a major strand of portfolio simplification are some divestments and demergers currently going on at Anglo. So they've reached agreement to divest their nickel business and their steelmaking coal businesses. Agreements have been reached and completion is expected in the second half of this year. Most recently, they have successfully demerged their Platinum Group Metals business, which if some of you follow Anglo American, you'll know is now trading as a separately listed company called Valterra. Anglo has retained just under a 20% stake in Valterra, which they expect to monetize over time. And the last bit of portfolio simplification relates to the diamond business, De Beers. Anglo are currently looking at whether that's a divestment or a demerger. So we'd expect to see more news flow there on portfolio simplification. And that will move the business to a faster-growing business focused on these future-facing commodities, a higher EBITDA margin business and a higher return on capital business. And so let's just look at what the new financial metrics of Anglo will look like in the new world. Pro forma EBITDA margins should move from 30% to 43% post all these divestments and demergers. The negative working capital drag from the pro-cyclicality that we've had historically, that reduces significantly in the new Anglo American. So cash conversion will improve. A new Anglo will be lower capital intensity. So returns on capital will also improve. So this is quite an attractive direction of travel for the new company, and we think the valuation metrics will follow suit. And that takes us to the third part of the turnaround, which is driving growth in the new portfolio. So behind me, on the far left, we've got one of their world-class copper assets. Top right, we've got one of their iron ore assets. And in the bottom right, we've got a digger, which is currently 1.6 kilometers underground at a mine in North Yorkshire in the U.K. So starting with copper. The new business, about 3/4 of the profit will come from copper. And Anglo has line of sight to increasing their copper production by about 1/3 over the medium to long term. And their copper production is in really long-life assets at low relative cost. And that production increase, it's a few things, debottlenecking existing facilities, expansion opportunities at existing mines and a few new greenfield opportunities as well. The iron ore business mentioned earlier, it's a premium higher-grade iron ore, which is becoming an increasing demand from their end customers. So they've already seen increasing demand there at the higher grades. And lastly, the fertilizer polyhalite, which is what that digger is about. Now the asset there is a mine called Woodsmith near Whitby. A lot of capital has been sunk into Woodsmith historically. And as part of the newer focus on capital discipline under the new management team, any further material CapEx has been paused at Woodsmith, while they do some scoping studies. And they've talked about the idea of syndication in that asset. So Woodsmith is really a 2027 onwards growth opportunity for Anglo American. So Anglo mine are operating in a tough cyclical capital-intensive industry. But where through significant self-help actions, we think the management team are taking the business from the self-help turnaround category, declining profit pools actually towards the growing profit pool category. So really interesting turnaround in your portfolio. And finally, I'll briefly touch upon Diploma. So we're looking at those wide range of opportunities, Anglo in that last bucket of self-help and Diploma is a holding really well exposed to growing profit pools. So in that first category where we look for enduring competitive advantages. So Diploma is a U.K. listed but frankly, globally present value-add distributor, serving customers in the life sciences and industrial end markets. So Diploma sits between customers that are in more regulated industries, more regulated environments and a fragmented supply base. And Diploma sit there as the value-add distributor in the middle. Now the business model is decentralized and Diploma really is a collection of 17 smaller distribution companies, each with a niche and strong technical expertise in that niche. Diploma, the plc, wraps around these 17, providing strategic oversight, guidance and crucially helping these smaller businesses scale. And Diploma is exposed to some really interesting profit pools, which I'll come on to shortly, and they have supported compounding returns to shareholders of Diploma, and we believe we will continue to do so. So whilst those 17 businesses are all slightly different, there are some unifying features which go to explain that value add that Diploma provide. So behind me, in blue, you can see product value add, and I'll touch upon these. And in orange, you can see service value add. So the first of the unifying features of those 17 smaller companies, I'm going to go anti-clockwise, is serving customers in regulated industries where the cost of failure is high. So it's a high cost for Diploma's customers if their components fail. So they need to work with technical experts that you have at Diploma to ensure that continuity. The second commonality is the bottom 2 segments in blue. And that is Diploma are providing low cost but critical components to their customers. So these components are typically coming out of a customer's operating expenditure budget rather than a capital expenditure budget. This reduces the cyclicality of Diploma's revenue and also gives some pricing power as these components are critical. And the final element of value-add is in orange. But instead of reading through the segments, I'll just touch upon an example. So one of those 17 businesses is a company called Hercules aftermarket in the U.S. It's about 5% of Diploma's revenue, so it's one of the smaller ones. They provide seals, so hydraulic seals to help repair heavy machinery. So end customers for Hercules aftermarket are industrial companies and miners. And for those companies, uptime and utilization of equipment is really crucial to the business model. So some of the value-add Hercules provide, overnight shipping of the components to where their customers need it, which is a strong value add versus competitors. Diploma has also positioned Hercules as the one-stop shop in the industry, so the broadest and deepest product availability. And finally, custom, something that Hercules do and other Diploma companies do, the ability to work with their customers to custom design products for their specific needs. So a strong element of value add at Diploma, an enduring set of competitive advantages, deep technical expertise, long-standing customer relationships, strong value add. And finally, the growing profit pools. A bit of a busier slide but across the top, you have the geographies that Diploma is present in. And going down the slide, those 17 companies have been grouped into Controls, Seals and Life Sciences, all serving those industrial and life sciences end customers. Now where the slide is colored in orange, this is where Diploma thinks they have moderate market share in that area, where it's gray, that's low levels of market share. And where it's white, that is brand-new white space growth opportunity for Diploma. So really strong business model, strong competitive advantages, when exposed to structural growth themes such as defense spending, space, electrification, automation and on top of that, a lot of potential growth ahead before this slide gets fully colored in. So we've talked through Anglo as an example of a self-help stock in your portfolio and Diploma as an example of a company held in the trust really strongly exposed to growing profit pools. And I'll pass over to Tom to talk about the middle category of stable profit pools and market share opportunities.

Good morning, everyone. I'm going to talk to you about Grainger, the U.K.'s biggest professional landlord. So the overall U.K. housing market is relatively stable. But within that, an important shift is happening. Supply of rental properties is shrinking whilst demand is growing. And we believe that the build-to-rent segment will continue to take share from small private landlords and this is an opportunity that Grainger can exploit. So in the next 5 minutes, I'm going to talk to you about the U.K. housing market, what Grainger do, why this opportunity exists and why Grainger can exploit this opportunity. So we all know that the U.K. housing market is tough right now. Buying a home is increasingly out of reach and for many, renting is becoming the only option. The government is trying to address this affordability and supply side issue but we still believe that despite this, demand for rental properties will remain strong, particularly for high-quality professionally managed ones. And this is exactly where we find Grainger and they're doing something very different from your traditional buy-to-let landlord. So Grainger operates in the build-to-rent segment. This means that instead of selling properties after developing them, they hold on to them and rent them out directly. These are modern, purpose-built, energy-efficient apartments. Currently, the build-to-rent segment only accounts for 2% of the U.K. rental market, with the other 98% dominated by private landlords but that landscape is changing. New stamp duty charges, stricter energy regulations and higher mortgage rates are making it increasingly difficult for Grainger's main competitors to operate profitably. At the same time, tenants' expectations are rising. Renters are increasingly demanding more than just a roof over their heads. They're looking for properties that offer better services, modern amenities and an improved overall customer experience. This is resulting in a very favorable supply side dynamic as we continue to see private landlords exit the rental market. So why do Grainger benefit from this? Almost all of their properties meet the energy standards and they offer superior customer experience. They operate their buildings professionally, maintain high occupancy at around 98% and they have pricing power, growing rents at least in line with inflation. Future energy efficiency standards are expected to come into force in 2030. These will require rental properties to have an EPC rating of at least C. Currently, less than half of private landlords properties meet this requirement. On the other hand, 94% of Grainger's properties do. They're more efficient, more compliant and better positioned for where the market is heading. New stamp duty charges have further tilted the field. A further 2% charge on buy-to-let purchases has taken the additional rate up to 5% and this further weakened the economics of Grainger's main competitors. And finally, the customer experience is fantastic. I've rented several flats such as the one on the left and having visited a Grainger site last month, I can tell you how impressed I was sleek, well maintained and better value than many comparable flats. The site featured on-site gyms, concierges, communal lounges and even a rooftop terrace, a clear step-up versus your typical rental stock. Grainger have a best-in-class operating platform powered by proprietary technology. This enables the business to be more efficient, more responsive to tenants when they have issues and it gives access to data and insights that small landlords simply don't have. This enables the business to be more efficient, drive a better customer experience and ultimately leads to improved financial performance. All of this gives Grainger a clear edge as the market shifts. Grainger accounts around 10% of the build-to-rent segment and the build-to-rent segment only accounts for 2% of the U.K. rental market. So there is huge room to grow as the market consolidates around professional operators. And for investors, the financial profile is compelling. Everyone needs a place to live and this makes Grainger's income both defensive and recurring. On top of this, they pay an attractive dividend yield, and they're currently in the process of converting to a REIT, which will only reinforce its total return focus going forward. So Grainger operates in a market where supply is shrinking, yet demand is growing. The overall U.K. housing profit pool is relatively stable but a growing share of that is shifting towards professional operators like Grainger. We believe this provides a highly attractive outlook and a very compelling story. I'll hand it back to Imran for the outlook.

Thank you, Tom and Emily. So the final section of the presentation covers our outlook for markets and the portfolio. It's fair to say there's a lot going on but that is just the nature of markets. Data has been mixed, some good, some a little soft. There's heightened uncertainty, whether that's around geopolitics or around tariffs. And that just raises the cost of doing business for corporates. For consumers, it just weighs on consumer confidence. It's just that much easier to delay a large purchase for a consumer or to delay a CapEx project for a corporate. Now when you look at the U.K., there are some positive dynamics. So you look at the blue line on this chart on the left, that's real wages have been growing strongly and that is nominal wages ahead of U.K. inflation. But the orange line talks to U.K. consumer confidence. And you can see that's subdued, perhaps because of the -- everything we read about in the press and the uncertainty around the macro. On the right-hand side, you see further soft data and that is -- so this is a chart showing payroll data. As you can see, it's been on a weakening trend. This probably is a function of a couple of things. Firstly, the decision to increase employer national insurance contributions and that has an impact on corporates and the decision to employ people. And then secondly, just that weaker corporate confidence given the uncertainties around. A mixed picture. It's the same when you look at the U.S. or indeed much of the globe. If you look at this chart on the left-hand side, you see the dark blue line, which talks to hard data. So that is the likes of building permits and industrial production holding up reasonably well. But when you look at the light blue line, that's soft data. So that's sentiment and survey data. And that's just another way of thinking about what's going on in the macro economy and quite often a leading indicator of what's going on. And you can see softer versus the hard data. And then you see on this chart on the right, this is U.S. small business confidence and a rising line shows increasing uncertainty. You can see that U.S. small businesses at the very least are feeling pretty uncertain. A mixed picture. So the picture is indeed mixed but our focus firmly remains on bottom-up stock picking. That's our key skill set. And that's where our confidence comes from, owning a collection of businesses that are advantaged, that will be able to produce profit growth even if the economic weather is a little tougher. And despite what you may hear elsewhere, I believe in the U.K., we have some fabulous businesses. Some are global in nature. That's like the likes of Diploma, which Emily talked about earlier, Halma and Sage, all fabulous franchises with a global bent. We also have some fabulous domestic franchises. You heard about Dunelm but Rightmove, Auto Trader and indeed Grainger are all examples of U.K. domestic businesses well set to deliver attractive total returns. So the economic weather may change but we're focused on building a conviction portfolio of advantaged businesses that can cope with a slightly tougher economic backdrop. We've deliberately constructed a portfolio that is well diversified from a thematic perspective and from an economic perspective. To conclude, the Edinburgh Investment Trust is a high conviction portfolio with a strong track record. Firstly, as you can see on the left, the trust owns high-quality businesses as evidenced by the return on equity, much higher than the market and operating margins much higher than the market and that talks to quality. The portfolio is full of advantaged businesses with good growth, comfortably ahead of the market. Thirdly, this is a portfolio that demonstrates resilience. And for us, resilience comes from 2 things: one, owning a portfolio that is sensibly levered; and secondly, from that thematic and economic diversification that we've talked about. And finally, on valuation, the portfolio is attractively valued in absolute terms. Yes, on a modest premium to the market, as measured by free cash flow yield but richly deserved given the higher quality, the higher growth and the greater resilience. In owning shares in the trust, you're owning a conviction portfolio of advantaged businesses well set to continue to deliver on attractive total returns and trading on a 6% discount to net asset value. That concludes the formal part of the presentation. I'll now hand you over to James, who will host Q&A.

Thank you, Imran. So yes, over to the time for you to ask any questions that you may have. As I said earlier, we're happy to take questions wherever you wish to go, both for the Board of Directors and for Imran and the rest of the investment management team. There are also, I think, some roving microphones. So if you could just please wait for the microphone to arrive and then we'll take the questions. So I think there was one just to my left here first. Thank you.

Thanks very much. You've done very well in your 5 years of taking over. And I have to say that our family have had shares in the likes of Edinburgh Investment Trust, the Lion's Trust (sic) [ Liontrust ] and others for probably 4 generations, maybe 50 or 60 years. And they have been a bit boring, I have to say, highlighting the FTSE companies in the U.K. But you're putting in a more imaginative situation and your performance has been good over the last 5 years. However, there are 3 really hot topics at the moment. One is lithium batteries and the company there is Amperex in Hong Kong. There is quantum computing and the company there is IonX (sic)[ IonQ ] on the NASDAQ. And the third one is artificial intelligence. And the company there is Palantir, which is also on the NASDAQ. Now I appreciate that the majority of shareholders want safety and regular dividends. And these sort of risky companies don't pay dividends and they rely on inherent growth. But in a large portfolio, it's worth having a few risky shares. I wonder what you think about that?

Thank you, James. So it is fair to say that we don't have an NVIDIA or a Microsoft or a Palantir or the 2 other businesses that you mentioned that I have not come across. But...

I'd just say that Amperex was the biggest IPO in Hong Kong history and has 38% of the lithium battery market in [indiscernible] and then maybe in Hong Kong and maybe in China, Mainland China.

So those are very interesting businesses that you've just raised, including NVIDIA and Microsoft. But we have companies listed in the U.K. that are sometimes first order beneficiaries of those trends that you just talked about or second order beneficiaries. And if I think about holdings in RELX, Auto Trader, Rightmove, Verisk, [ BCG ], these are all fabulous data businesses that will benefit from artificial intelligence. These are businesses with very powerful data sets that have become increasingly valuable with the advent of analytics and AI. So yes, we might not have an NVIDIA or a Palantir. We do have some brilliant businesses trading on very attractive valuations given the growth. And then to some of the other areas, to your lithium battery business, we have National Grid. And yes, it's not a direct play on lithium but it is benefiting from some very powerful structural trends. Of course, there's this transition to EV vehicles in automotive. We're all trying to decarbonize our homes. So this move to air source heat pumps, for example. And in National Grid, we have a play on that dynamic, paying a very attractive dividend yield and seeing very strong medium-term earnings visibility. Now it is our job to make sure the portfolio is well set across a range of themes and across a range of growth areas. And some of the positions are riskier than others but there are also some very attractive defensive businesses and it's getting that blend right.

Okay. A question on the front row here. Thank you, [indiscernible].

One of your earlier slides in the positive box was the company Diageo. Diageo has what, [ 23% ] down in the last year and you never mentioned it. It evaporated.

That's one for me. So you're absolutely right to observe that Diageo has been a pretty poor performer. We don't own any shares in Diageo. And because it's a relatively large company, it's a large part of the index. So the fund from a relative perspective, as the benchmark, which is remember what we measured on, it's been a positive contributor by not owning it. So that was an active decision by us and Emily has actually done a lot of work on Diageo. We've actually taken a very close look at it recently after this significant decline. So I'd describe it as a success not to own it and it's been a positive relative contributor. But we're now taking a closer look at it. It still has some issues. We're still not quite comfortable with it but we are taking a close look. And one of the issues is, I guess there's 2 main issues. One is the balance sheet and it's slightly too levered for our liking. And secondly, the alcohol consumption trends have been very weak. And what we don't know yet and we didn't answer for this and we're doing some homework, is whether it's structural or cyclical. If it's cyclical, we're much more interested in Diageo. If it's structural, we're probably going to stay away.